Archive for February, 2009

It begins with energy

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So said President Barack Obama in his pre-budget speech on Tuesday night as he unveiled the core elements of the budget that he will present in the coming days.

Then came the real content:

We know the country that harnesses the power of clean, renewable energy will lead the 21st century. . . . . .  we will double this nation’s supply of renewable energy in the next three years. We have also made the largest investment in basic research funding in American history . . . . . . . But to truly transform our economy, protect our security and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power, advanced biofuels, clean coal and more fuel-efficient cars and trucks built right here in America.

On the day of Pearl Harbour, Japanese Admiral Yamamoto is now quoted as having said “I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.” Whether he did or not is beside the point – but the sentiment is perhaps the same as that now seen within the new US administration. Don’t think for a minute that these issues will drop off the agenda or that the financial crisis will somehow deflect polictical attention away from energy and climate change.

But equally, don’t underestimate the job that must be done. On the one hand it is vast in scale, but on the other simple in terms of the actions that must be taken. There are only four areas on which to focus – energy efficiency, renewables, nuclear and carbon capture and storage. Alternatively, looking at it from a sectoral perspective it is power generation, industry, transport and buildings/commerce. To quantify the scale it is useful to visualise it, first graphically, then pictorially.

Graphically it looks something like this:

The US energy transformation through to 2050

The US energy transformation through to 2050

In this graph the position of each bubble represents progress up the energy ladder (as a highly developed economy the direct energy-GDP link has largely ended, as US per capita GDP continues to rise without a great need for additonal per capita energy). The slope of the line between a bubble and zero represents efficiency and it can be seen that the efficiency of the US economy has been gradually improving over the last three decades. The size of each bubble represents the type of energy being used, so the bigger the bubble the more CO2 intense the energy source.  From 1971 to 1990 the bubble shrank a little as nuclear and natural gas became significant parts of the energy mix, but that trend has stopped. Looking forward to 2025 and 2050, the change is significant compared to the last thirty years.

Pictorially it might look like this (run the slide show – full screen is best):

The much maligned EU-ETS

The EU Emissions Trading System (EU-ETS) started up successfully in 2005 and its critics haven’t stopped finding fault since. Unfortunately, these critics rarely tell the whole story and those who read the criticisms are probably not in a positon to know what is actually going on in the EU.

In a recent editorial, the Washington Post supports the arguement for a carbon tax by using the EU-ETS as “Exhibit A” in the case against emissions trading. Whilst the facts it presents are not incorrect, the context within which they are presented is questionnable.

  • Emissions targets were set too high. . . . . The value of a carbon credit plummeted.” At the start of the ETS the data on which the EU Commission based its initial allocation was of poor quality and the Commission also took a very conservative approach to the cap. After all, this was a learning phase during which they were looking for participants to learn to measure, manage, trade and account for emissions – all of which happened. By design, the phase was stand-alone, in that there was no facility to bank surplus allowances into future periods. This meant that when the market realised the three year phase was in surplus, the price plunged quickly to zero as surplus allowances would have no future value. But the phase was a success in that a large liquid market with well prepared participants resulted.
  • Companies made windfall profits by charging customers more for energy while selling allowances they didn’t need.” The Commission recognised that over time the CO2 price would be passed through to consumers and they indicated clearly that such pass through would trigger a shift to auctioning. That is exactly what has happened and in Phase III much higher levels of auctioning will be implemented – 100% auctioning for most of the EU power sector where price pass through is a reality. The lesson learned here, and picked up by the Regional Greenhouse Gas Trading System in the USA, is that a deregulated electricity sector can pass through the CO2 price very quickly and so should be subject to much earlier auctioning.
  • And the Europeans have not had much success reducing greenhouse gas emissions.” Emissions within the traded sector are within the cap that has been set and continue to be. Emissions will only fall by the amount the cap dictates, no more. It is not a question of “success” as such, but a question of where the cap is set. And we know that this was set conservatively in the first phase for the reasons given above.
  • Disputes on the next round of reductions led to the creation of a two-tiered system to appease Eastern European countries fearful of the cost to their industries.” A deal has been done between 27 sovereign states to move ahead with Phase III of the system. The cap is clear and is linked to the EU target of a 20% reduction by 2020. Most of the allowances in Phase III will be auctioned to participants, but some industries will still qualify for free allocation, but subject to a tough benchmarking process. Only only one in ten of these industries will actually get their full allocation for free and they will be the lowest emitters in any sector.

Put simply, the EU-ETS works. Yes, the first phase had its issues, but much has been learned from this. Others can put the learnings to immediate use. Phase III will be very different to Phases I and II. The EU now has a robust system in place that can and will deliver the needed reductions.

The editorial goes on to argue that “A carbon tax, by contrast, is simple and sure in its effects. Last summer, when gas prices shot up past $4 a gallon, average miles driven dropped significantly, as did energy consumption.” It is certainly true that a $2+ rise in the price of gasoline will change driving habbits, but that is equivalent to a tax of over $200 per tonne of CO2. Such a tax would roughly triple the price of cement for example. By contrast, the EU-ETS has traded in the range of $10-$40 per tonne of CO2 and that alone has resulted in a complete change in the way the power generation sector is operating. It has even been sufficient to get companies thinking hard about when they should start to implement carbon capture and storage.

David Presenting to UK Media

Presenting to UK Media

The policy solution is neither a blanket tax or a total reliance on cap-and-trade. The latter is ideally suited to the big emitters such as power generators and large industry. With a cap in place the power sector can begin its journey to zero emissions and get there in 30+ years. Much of the manufacturing sector can do the same, but probably not completely, so they may rely on some form of offset for many years to come. It is hard to imagine any lawmaker implementing an immediate $2 gasoline tax (which is quite possibly why some are advocating they do) and even that may only drive the US auto sector to look like more like its EU counterpart – where an even higher gasoline tax has been in operation for decades. A different approach is needed here, one that agressively targets vehicle efficiency, incentivises lower carbon fuels and implements road use policies such as the Congestion Charge in London. Finally, the built environment needs urgent attention as well, but revised building codes and efficiency retrofits (e.g. insulation) are probably the answer.

Yesterday I gave a short presentation to various London media folk on emissions trading:


But I found a better presentation on the basics here:

A bit of focus please

Amongst the continuing gloomly financial news this week, we were reminded that the impact of climate change is unaffected by the short term prospects of the global economy. Professor Chris Field, speaking at the American Association for the Advancement of Science conference in Chicago, claimed future temperatures “will be beyond anything” previously predicted. “We are basically looking now at a future climate that is beyond anything that we’ve considered seriously in climate policy,” he said. Professor Field said his 2007 report, which predicted temperature rises between 1 deg.C and 6 deg.C over the next century, seriously underestimated the scale of the problem.
But the recession is having quite an affect on the response.
In Australia, after the Garnaut report, the government Green Paper and very recently the White Paper on the final design of the emissions trading system, the government has asked the parliamentary Economics Committee to “inquire into the choice of emissions trading as the central policy to reduce Australia’s carbon pollution”. This in the same month Melbourne saw record high temperatures, that I as a native of that city, never even imagined were possible. Whilst enquiry is the natural course of government, coming so late in the process will be unsettling for the markets that are already starting to form around the prospect of allowance trade in Australia. Unease, delay and caution in the face of recession are not what we need.
On the other side of the Pacific, again triggered by the recession, a massive stimulus plan has been approved by the House and Senate in Washington and now awaits the President’s signature. Within it are billions for renewable energy, carbon capture and storage and energy efficiency measures such as home insulation. This is all good, but where is the broader plan within which this sits and the emissions trading system to drive future deployment after the initial boost from the stimulus. In reality, it could still be three or four years away – and that will just be for the start-up phase. I alluded to the framework back in January and whilst I welcome the energy components of the stimulus package, the encompassing framework is really a necessity.
So, a mixed week for government staring down the twin barrels of climate change and recession. Whilst stabilising our economies remains an essential priority, a laser like focus on energy and climate change is an absolute necessity.

The big picture

This week in the “Green Room” on the BBC News website the opinion article discusses the role of population and the environment. Not surprisingly a furious debate on the issue follows. I am not going to enter into that affray, but it is useful looking at this issue in the context of CO2 emissions.

The discussion on population and growth is best described by the Kaya Identity which can be written as follows:

CO2 emissions = Population * Wealth/person * Energy/GDP * CO2/Energy

The four parts of this simple equation show the key elements that contribute to overall energy related CO2 emissions. Apart from population, there is a factor for development (i.e. wealth per person), a factor for the energy we use to generate a unit of wealth (or Gross Domestic Product – GDP) which can also be called “efficiency” and finally a factor that represents the type of energy we use to generate that wealth, but expressed in terms of CO2 emissions.  This final factor will be effectively zero for wind, but quite high for coal, for example.

Arguably, all four of these factors should be in play when it comes to managing CO2 emissions. In reality, we are limiting our efforts to just two of them. We don’t really want to talk about population and we seem to have even less desire to talk about wealth limitation. The latter is also problematic given the large wealth disparity that exists in the world today.

That leaves us with efficiency and the type of energy we use. This is where the big focus of policy development sits – encouraging energy efficiency and using tools such as emissions trading to shift the type of energy we use to lower CO2 options or to eliminate the CO2 emissions using technologies such as carbon capture and storage.

The question that the Kaya Identity poses for us is a simple one. Can we reduce CO2 emissions by nearly two thirds in just 40 years (i.e. a 50% reduction from 1990 levels by 2050) whilst population and GDP inexorably rise (by ~50% and ~300% respectively), relying only on energy efficiency and a shift in the type of energy we use (or the massive application of carbon capture and storage) ?